This is a transcript of submitted evidence to the Parliament of Canada's Senate Committee on Banking, Trade and Commerce. Here is a video. The opening remarks can be found here.

Another transcript may appear here but who knows.

An additional transcript can be found here.

final report:

Prepared remarks.

My experience is primarily in information security and network architecture. I have a Master’s degree in networks and distributed systems and have worked in this field since 1992. I spent 20 years working on networks and data centers for financial services companies, before I found bitcoin in late 2011. I have been working full time in the bitcoin space for the past 2 years and written a book on bitcoin for software developers.

Today, I welcome the opportunity to talk to you about bitcoin security, the de-centralized architecture that underpins bitcoin’s security and the implications that architecture has for privacy, individual empowerment, innovation and regulation.

Until the invention of bitcoin in 2008, security and decentralization seemed like contrary concepts. Traditional models for financial payment networks and banking rely on centralized control in order to provide security. The architecture of a traditional financial network is built around a central authority, such as clearing house. As a result, security and authority has to be vested in that central actor. The resulting security model looks like a series of concentric circles with very limited access to the center and increasing access as we move further away from the center. Even the outermost circle however, cannot afford open access. In such a security model, the system is carefully protected by controlling access and ensuring that only vetted individuals and organizations can connect to it. The entities near the center of a traditional financial network are vested with enormous power, act with full authority, and therefore must be very carefully vetted, regulated, and subject to oversight. Centralized financial networks can never be fully open to innovation because their security depends on access control. Incumbents in such networks effectively utilize access control to stifle innovation and competition – presenting it as consumer protection. Centralized financial networks are fragile and require multiple layers of oversight and regulation to ensure that the central actors do not abuse their authority and power for their own profit. Unfortunately, the centralized architecture of traditional financial systems concentrate power, creating cozy relationships between industry insiders and regulators and often lead to regulatory capture, lax oversight, corruption and in the end, financial crises.

Bitcoin and other digital currencies based upon the blockchain architecture are fundamentally different. The security model of blockchain currencies is decentralized – there is no center to the network, no central authority, no concentration of power and no actor in whom complete trust must be vested. Instead, the core security functions are put in the hands of the end users of the system. In this architecture, security is an emergent property of the collaboration of thousands of participants in the network and not a function of a single authority.

In addition to the differences in architecture, there are also fundamental differences in the nature of the payments themselves. Digital currencies, like bitcoin, are much more like cash than bank accounts or credit cards. The transfer of value in bitcoin is a “push” mechanism not a “pull” mechanism as is the case with credit cards, debit cards, and most other digital payments. A bitcoin payment is not an authorization to pull from your account, instead it pushes the precise payment amount itself as a value token directly to a named recipient. A single transaction does not authorize any future transactions or expose the user’s identity. The transaction itself is unforgeable and unchangeable. As a result, bitcoin payments can be transmitted in the clear (without encryption) over any network and can be stored on unsecured systems without fear of compromise.

Bitcoin’s unique architecture and payment mechanism has important implications for network access, innovation, privacy, individual empowerment, consumer protection and regulation.

If a bad actor has access to the bitcoin network, they have no power over the network itself and do not compromise trust in the network. This means that the bitcoin network can be open to any participant without vetting, without authentication or identification, and without prior authorization. Not only can the network be open to anyone but it can also be open to any software application, again without prior vetting or authorization. The ability to innovate without permission at the edge of the bitcoin network is the same fundamental force that has driven internet innovation for 20 years at a frenetic pace, creating enormous value for consumers, economic growth opportunities and jobs.

Bitcoin’s decentralized nature affords consumer protection in the most powerful and direct way – by allowing bitcoin users direct control over the privacy of their financial transactions. Bitcoin does not force users to surrender their identity with every transaction and put their trust in a chain of supposedly vetted intermediaries who must be trusted to control access to, securely store, and protect transaction data and vulnerable account identifiers. Bitcoin transactions never expose vulnerable account identifiers and bitcoin users can protect the privacy of their transactions without relying on, or trusting, any intermediaries.

Because, in bitcoin, trust is not vested in central actors, there is no need for centralized regulation and oversight. When properly architected, bitcoin financial services are not vulnerable to central points of failure which would necessitate heavy-handed oversight and regulation. Instead, the power lies with the end user, whose interests are most aligned with the protection of their own funds. While individual bitcoin wallets can be targeted and compromised, if not properly secured, the bitcoin network does not suffer from centralized systemic risks.

Contrary to popular misconception, bitcoin is not unregulated. Rather, several aspects of the bitcoin network and financial system are regulated by mathematical algorithm. The algorithmic regulation in bitcoin offers users predictable, objective, measurable outcomes, such as a predictable rate of currency issuance. These outcomes are not subject to the whims of centralized institutions or committees, which are both corruptible and often placed outside of democratic oversight. A bitcoin user can predict the monetary supply 30 years from now instead of hanging on the nuanced intonation of a single adjective by some high official of central-banking who can dramatically change an entire country’s monetary velocity a week hence.

Bitcoin’s decentralized architecture does not easily conform to the expectations and experiences of consumers or regulators because there has never been a large-scale secure decentralized network before. The combination of decentralization and security is the novelty at the heart of the bitcoin invention. In trying to understand consumer protection, oversight, audit, and regulation of bitcoin there is a risk that many will try to apply familiar models of the past to this new digital currency system. These models are all centralized and designed to provide regulation and oversight of centralized financial networks. Centralized solutions will be easier to understand and seem familiar, however, they are both inefficient and unsuitable for this new form of decentralized financial network.

I urge you to resist the temptation to apply centralized solutions to this decentralized network. Centralizing bitcoin will weaken its security, dull its innovative potential, remove its most disruptive yet also most promising features and disempower its users, while empowering incumbents. Consumer protection will not be achieved by removing bitcoin’s built-in privacy characteristics. Demanding user identifiers and adding access control mechanisms on top of the bitcoin network and then trusting those identifiers to a chain of intermediaries will only replicate the failures of the past by introducing single points of failure into a network that has none. We cannot protect consumers by removing their ability to control their own privacy and then asking them to entrust it in the same intermediaries who have failed them so many times before. Most failures in bitcoin security are the result of misguided attempts at centralization and removing control from users. In this new decentralized financial network, we have the opportunity to invent new decentralized security mechanisms based upon innovations such as multi-signature escrow, smart contracts, hardware wallets, decentralized audit, and algorithmic proof-of-reserves. These are the new decentralized regulatory and security tools that are most appropriate for a decentralized digital currency.

Thank you for the opportunity to address this committee.

(11m 32s)

Other remarks.

Thank you for your opening remarks. They have clearly resonanted. They have stimulated a number of questions. Before I turn it over, I thought I might make an observation. In your remarks, you have told the committee that the decentralized security of the blockchain currencies is indeed secure. And that bitcoin financial services are not vulnerable to central points of failure that would necessitate regulation. So you have concluded that it should be left hands off. "Centralizing Bitcoin will weaken its security." While listening very closely to your comments, I couldn't help but observe you make absolutely no mention of illegal activity in cryptocurrency like Bitcoin. You make no mention of money laundering or terrorism or anything else, because of the anonymous and open nature of Bitcoin. You have stated in your presentation that the Bitcoin network can be open to any participant without vetting, without authentication, and without prior authorization. I suspect that the potential misuse of Bitcoin for nefarious purposes is very much a concern to Canadians as well as to this committee. Would you have any comments on that? And perhaps they will have this in their questions as well.

Absolutely. I believe there is a great misconception that Bitcoin use is anonymous or that the network is itself anonymous. The central public ledger allows any participant to observe all transactions that occur on the network. Those transactions are not always tied to a specific identity. With the use of traditional law enforcement mechanisms, when an identity is attached to a specific transaction, that transaction can be traced throughout the entire network. It does not afford omre anonymity. It is easier to implement strong accountability features on Bitcoin. I think that Bitcoin is not a very convenient network for such uses. The vast majority of such transactions occur with cash, the U.S. dollar, I don't see Bitcoin as the primary vehicle for those activities. I see a potential use for Bitcoin for the more than 6 billion people who have limited access to international trade and international credit. I think that such opportunity outweighs the tiny minority that puts Bitcoin to illicit use.

Senator Black: Thank you very much, Mr. Chairman. And thank you very much Mr. Antonopolous for being here. I am finding real interest in what you have to say. Let me outline what I am hoping to come to understand from you. I am interested in coming to learn what is needed that this innovation can continue to develop. That's my premise, right or wrong. Building on the chairman's initial comments, I do have a question or two for you. When CAVirtEx testified before this committee, they stated that they want to see bitcoin regulations put in place as soon as possible to bring clarity about bitcoin's classification. They said this would allow bitcoin to thrive in Canada. In your remarks, you say that Bitcoin should not be regulated centrally. Considering that other groups have said the same thing as CAVirtEx, help me with this disconnect.

AA: Absolutely. I believe that the best way to help bitcoin is to ensure that there is clarity in the treatment of bitcoin and that bitcoin is not essentially forced into, to contorting itself into regulatory structures designed for banks by banks, or for traditional models of finance, which are centralized. Recognizing that bitcoin is novel, with multi-signature escrow, has many flexible ways of responding to the needs for consumer protection. For example, in the traditional banking sector, every account you have is a custodial account. They are held in trust by a bank. What you have in return is a promise note that the money will be there tomorrow morning. The banks control the funds entirely. Bitcoin allows a much more varied range of control between a consumer and the ifnancial services institutions that they might use. They can have completely decentralized control where the users are the only ones that have access or control, to complete custodial accounts where the consumer has no access but the institution does. There are also hybrid roles and models, like a signatory role at the bank but they can't change the direction of the funds, merely to approve transactions. Within this broad range of possibilities, some of this needs to be regulated. If you simulate a traditional financial environment with a custoidal account where you take control of user's funds, those funds are outside of the bitcoin security model. They are no longer protected by the user's control of the keys, or protected by the blockchain. They are in a grey area, where they are no longer required for security requirements, liquidity requirements, but they are also not required by the bitcoin security. We have seen this happen before, almost all of the exchanges that have been attacked in bitcoin have had a full custodial model like that. There are other models. There are wallets where the user has complete control but transactions cannot happen unless an additional signature is added by an institution that acts as a risk manager, such that the user when compromised can't lose their money. If you lump all of these together, assuming that it's all just like a bank, you miss out on the opportunities for better solutions with this new programmable model. I do believe that certain models for bitcoin models must be regulated. If the control over the funds is centralized, then that puts consumers at risk. But if the user has full control of funds, and then lump everything else, it is misguided and does not leave any room for that technology to develop further.

Thank you very much for that. What would you suggest in terms of regulation if any?

AA: I believe we are still at the early stages of this technology. Not only is bitcoin new, but it is already evolving. The capability to do multi-signatory transactions, that technology was introduced in 2012, 4 years after the introduction of Bitcoin, and came into full availability in 2013. So already Bitcoin is developing new and exciting programmable capabilities for user security. I think this technology needs time to breathe. It needs time to show the full potential for decentralized programmable money. Until that time, I think that opening those possibilities by making clear distinctions where the technology allows it, between decentralized versus centralized operations, understanding those niches where new players can enter the financial services market and introduce disruption, participation and innovation, and try out new models of consumer protection that I believe are superior to those today. I believe that the best answer is to wait until the technology is better understood by all of this. Understand that there are nuances in this technology that require very careful treatment, because a blanket treatment where this is just a currency, or as if there is only one application of bitcoin, which it is not just a currency, would stifle this technology in its early days.

Senator: Thank you chair, and thank you so much for coming today. I remember when I got an IBM electronic that had the x backspace so that I could correct letters. And I thought that nothing would ever be cooler than this. It's impossible. And I'm 67, that's my generation. Would it be fair to say, and you say it needs some breathing space, I'm asking you, would it be fair to say, that the younger generation gets this? More so than my generation?

AA: With any new technology I think that's the case.

Senator: Would you say for instance, that I would get into bitcoin? I don't really understand it even still, and we're on our 11th meeting. We're lucky that Paul knows. Senator M knows, that's true. When I talk with younger people about this committee, they totally get it. They have no questions at all. They know where we are going and how we get there. I have been told to keep my old nose out of it. I think you explained, how much time does it take to breath? How long does this take? How rapid?

AA: I would estimate that bitcoin today is in the same position today that the internet was in 1992. When I used it in 1992, it required command line unix skills typed into a mainframe and it was very difficult. Approximately 10 years after that, it had reached mainstream adoption especially among younger people and almost 20 years after that exactly, my mother got her first ipad and sent her first email. It took a while where it took from someone working in a computer science department, to the time when my mother could do it with the swipe of a finger and she's a self-acknowledged technophobe. I think that this will be 3 times faster because we are not deploying physical infrastructure and we already have the internet. I think that within 8 years we will see mainstream applications that will allow consumers to use bitcoin that feels very comfortable and at the moment we are not there.

Senator: Just one more question. The question I have is that if you don't need any centralized oversight, who provides? You say well, the frontend user and the enduser control the whole thing. If there is nobody finding out who the frontend user, how can we be so sure that we wont see ISIS or one of thse other wackjob crews? Use this for a method of transmitting money around the world?

AA: I firmyl believe that the positive use of this technology far outweighs the negative use of this technology. The truth is that ISIS is probably using pallets of money that they stole from allies during their reign of terror, and not bitcoin. I think that it's really a matter of understanding that to limit technology that has the possibility of bringing economic inclusion to billions of people who do not have it today, in the same way that cell phone technology allowed entire nations to land in the tech realm and leapfrog the telephone landwire thing, bitcoin can do the same for finance and it can empower billions of people around the world, for remittance, international credit, accessing liquidity and loans and things like that. As with any technology, this technology will reflect society and there will be a tiny tiny minority that will try to use that for evil. But I have full faith that the law enforcement capabilities when properly exercised can follow funds, perhaps even better than they can in traditional financial networks. I think that bitcoin is the most transparent and open cryptocurrency. There are already 500 others. Given the opportunity to work in a way that empowers people, eventually criminals will move to far less open and more stealthy currencies and use those instead.

Senator Greene: Thank you very much for coming. This is without question the most interesting topic we've looked since I've been a member of this committee. I've just been amazed by this. One of the things I was thinking about last night as I was reading your paper, the idea that occurred to me, and I want you to comment on it, Bitcoin and related currencies is not hackable because there is nothing to hack. Is that a true statement? I wonder if it is, if you could explain that in very simple term, because I imagine there are a lot of people watching this.

AA: Individual bitcoin wallets cna be hacked. My wallet can be hacked. We see examples of this. The system of a whole cannot be hacked. The reason why I say this is that because over the past five years, with value transferred over that network exceeding $5 billion US dollars, there has been no shortage of people trying to hack bitcoin. What we have seen is that bitcoin has changed the dynamics of hacking and cybercriming, it has escalated the attacks, it has created a target for hackers that is extremely fluid that resides on people's computers. They have tried to take advantage of that. I know that people can't hack bitcoin because so far nobody has been able to. They have been trying non-stop. There is a big difference betweenthe system as a whole, which responds to hacking attacks as a dynamic system. And individual wallets. There is a similar timeline with the internet. I remember a time when groups of attackers could take down yahoo or microsoft for a day. They don't do that these days. It's because there is a dynamic system constantly exposed to threatening stimuli will develop resistance, and become more resistant over time. This is a concept called anti-fragile. It becomes dynamically stable and resistant to attack. Bitcoin is not static. It deals with attacks better over time.

Senator: In the answer to the previous question, you mentioned that there are roughly 500 other cryptocurrencies. What is the size of bitcoin in relation to those? Are they major competitors? Are they copycats?

AA: For the most part they are copycats. My perosnal opinion is that the allocation of cryptocurrency in terms of market size, adoption, users, will follow a long tail or power law curve where the vast majority is concentrated in a few top maybe a handful of currencies, and then a tail that encompasses thousands of smaller currencies. The dynamic of being able to create currencies at whim creates an environment where there will be thousands and tens of thousands of currencies in the future. Only a handful will have some market value or viability. That does not change the nature of it. People will create currencies in the same way that they create internet memes. We have seen that happen in currencies. So what's happening here is a laboratory of evolution and innovation where new ideas are tested. Some of the best results of that are often catastrophic failures on a small scale that informs future designs for Bitcoin.

Senator: That's amazing. Do you foresee a time, in the interest of economic development, that a nation state decides to forego its own currency and adopts Bitcoin?

AA: That's a difficult question. I think that the very nature of currency is changing. And so, I think that the, the economy, or the organization that is adopting the currency is the internet, which is trans-national, I think that has even more implications for the future than national currencies. Bitcoin is already bigger than some national currencies and in the future it may be bigger than dozens of national currencies. I do foresee that in the future central banks may utilize bitcoin blockchain technology to underpin their own national currency.

Senator M: Thank you chair, and thank you for being with us. This is very interesting and useful. From our chair.. in fact, your presentation makes a reference to, discouraging us from recommending identification, and I think your argument is that, it's always visible. The chain is very visible. But what you dn't see in the chain is who is behind the chain. This is why people of illegal objectives are prepared to use it, as apparently they are using it to transmit money and launder money. I gather your argument that is that you recognize it, but please don't hesitate with that issue, don't put measures in place to restrict that flow, because the usefulness of htose measures is lesser than the use of society letting it develop.

AA: I am recognizing two aspects. One is that attempts at imposing identity on bitcoin will in my opinion be ineffective because there will always be channels by which non-identifiable transactions can be introduced. It will remove one of the main advantages. Senator, today I have received three phone calls from Visa fraud prevention because I used my card in Canada. They have been calling me all day. This has happened every time I travel. By releasing an identifier from my account, and ties my activities and transactions, I am not only giving up my financial security, but also my privacy. This system is non-viable. I watch every few weeks on the news that yet another group that has had 50 million consumer cards and identities lost. For the average consumer that means that there is months of identity protection and risk. What we have seen over the few decades is that protecting information security systems such taht we can prevent fraud and theft is not possible. The mistake is tying this to our accounts in a way where it can continuously draw from our accounts. Bitcoin has the opposite strategy.

Senator: The benefits of this form of transfer is more important? I gather that's what you're saying?

AA: The invention of blockchain technology allows any of these systems to be used for ill intent (without identity), and there's nothing that can be done to stop someone from using it. I think that trying to stop this would harm the vast majority of people who do good with it.

Senator: Every time we achieve a certain point in life, we look at central banks because we're a banking committee. they come up with new theories about money supply, controlling inflation, controlling currency, we always learn 30 or 40 years later, "well sorry, we got it wrong." well, shit happens in other words. When you say you have an algorithm, and you say you got it right, well in 20 or 30 years, you might find out that you got it wrong. Clue me in to this. What are the weaknesses here?

AA: I think that what's useful to understand is that Bitcoin's monetary policy is just one recipe that is possible. What bitcoin and other cryptocurrencies allow us to do is implement different monetary policies and then fix them in place. If Bitcoin's monetary policy is wrong, people will move to another cryptocurrency with the same characteristics but a different monetary policy. I don't know if it's right or wrong. But I do know that I can tell you to the millionth decimal point how many currency units will exist in Bitcoin in 30 years or even 110 years. It provides certainty. It provides predictibility. It allows people to adjust their expectations for that. Whether it's the right monetary policy or not, well, you can build your own with your own monetary policy, well, then it competes.

Senator: Well maybe the supply is limited. But will it be equal to the demand growth? So the price of the currency may fluctuate immensely, but the reason of the algorithm is to project the future growth. So maybe if you have high fluctuation of value it may discourage its use.

AA: At the moment volatility is a reflection of very low liquidity. but bitcoin's recipe is to simulate the supply curve of a precious metal of something like gold. That is a very specific monetary theory. You can build a different blockchain technology currency where the monetary supply is defined by a committee of 12 central bankers, and then invite users to adopt htat. It would still be more transparent than our current financial ecosystem.

Senator: Thank you very much chair and I am pleased to be filling in for someone. (David Wells). Thank you for coming and thank you for your answers. Who are bitcoin's biggest detractors and why are they enemies of bitcoin?

AA: I am not sure who bitcoin's largest detractors are. I know that everyone I know in bitcoin started out as a detractor. My initial response to bitcoin was "this is nerd money and it can't possibly work". When Satoshi Nakamoto invented bitcoin and announced it on the crypto mailing list, everyone around him responded in the same way. The circle of advocates which is now numbering in the millions consisted of people who started out as very strong skeptics. That was my initial reaction. The second time I saw it, I read the paper, and saw that it wasn't a currency, and that it was a decentralized network for trustless transactions that allows for currency but also other things. This blew my mind. This was much bigger. We all started out as skeptics. I don't know if all skeptics turn over time, but I do know that there's a lot more than meets the eye to this.

Senator: What is the biggest threat to growth? Fear of unknowns, security aspect, level of technology available, or the individual nodes might not have the security that the whole system has?

AA: I think there's some very significant security problems regarding the control or ownership of private keys. We have been doing information security for a few decades and as an industry that industry is not very effective, whether protecting credit cards or bitcoin for end users. That risk is compartmentalized so that there's no systemic risk. I think we will see hardware wallets such as the ones that are starting to be marketed today. As an entrepreneur, for every problem in bitcoin I see an opportunity. If you go back to the internet, in 1994 there were dozens of articles about how the internet would fail because there's no way to find anything, well Sergey figured that was an opportunity and went on to create a company called Google. Same thing happens in Bitcoin.

Senator: Of the millions of bitcoin users, who would constitute the biggest user group? International financial transactions? Who's the biggest user now?

AA: Honestly, I think that there are a few statistical surveys that provide some insight into that. I think that the most common use right now is charitable giving, donations and tipping. I would say that the demographic at the moment is the same as the early internet, which is a very narrow demographic of technology professionals. There's a lot of nerds in this space. I can say this for sure. It follows, the same path as any other technology. It's becoming more and more broadly appealing to a broader demographic over time. For me, the most interesting thing is not what bitcoin can do for western developed countries. We have fairly sophisticated banking systems. I am fascinated by the idea of deploying bitcoin on a nokia feature phone and deploying it to Nigeria to people who have never had access to international credit who could now be connected to everyone else in the world on an equal footing. I think this is where the greatest need lies that Bitcoin can fulfill.

Senator R: Most impressive. When you started out that you have spent 20 years working on networks and data centers for financial services company, all of the sudden I say, they must be in dire need of hiring you back. "He's not for sale." [laughs] No, but. With all the knowledge that you have gathered about cryptocurrency, what would be your guestimate to develop and create a similar cryptocurrency?

AA: I am not sure I understand the question.

Senator: You said there are 500 different cryptocurrencies. What would be the cost to develop and create a similar cryptocurrency as Bitcoin?

AA: Well, every day somebody decides that Bitcoin isn't the correct answer and that they have a better one. They go ahead nad choose to try and build a better cryptocurrency. It has taken the natural inclination of people to create currency as a form of language, expression or value, which exists in every society, from prehistoric time with beads and feathers, with comapny credit, company script, federal, nationalized monopoly money, that possibility of not only creating currency but that currency being instantly from its creation, global, secure, fast, predictable and transparent, that capability means that a 10 year old can create a currency, and it could be as secure as a currency created a few centuries ago. Just as desktops brought communication into the hands of individuals, just like it was previously only the purview of those with foot-ball sized printing presses, the blockchain has democratized the ability to create new currencies, for any reason that may be serious or totally trivial, and that currency is instantly secure, unforgeable and without cost. You can go on to a website and create a new cryptocurrency for a fifth of a tenth of bitcoin, for a very small amount, and very soon that will be free. You will see coins created by children, performers and entertainers and football teams. Most of these will only have entertainment value, but some of these will surprise us and it will pass into the realm of economic value. It changes the relationship between individuals and the form of currency.

Senator: You said that while individual bitcoin wallets can be targeted and compromised if not properly secured, how can one properly secure its bitcoin wallet?

AA: With great difficulty right now and great technical skill. This is one of the issues that needs to be addressed over the next many years to make it more accessible to mainstream users. Right now it's difficult to do so because computer systems are not designed to secure money that resides purely digital, like on your iphone or desktop computer. For experts and specialists there are new devices that come out, like hardware wallets that are embedded in a device that you plug into your computer. I actually print out my bitcoin keys on paper and I put them in a fireproof safe. And I store a second copy in a bank vault. That's ironic. Making it physical allows, that's the greatest form of security that I know how to do. Physical security is something we're familiar with. Information security is being accelerated because of bitcoin.

Senator: You indicated that a person could acquire a loan in bitcoin. How would one go about that?

AA: Well there already organizations that implement something called peer-to-peer lending that exists in traditional currencies, there are companies like where I can make a loan to a fellow American and they will end up paying lower interest rate than a credit card, but I would get the interest rate higher than I would with a certificate of deposit. If I diversify enough, I can suffer a pretty low default rate. Thta model can be taken global. There are companies already doing this. I can take money anywhere in the world, I could invest in 2 or 3 thousand different loans such that a default on one loan wont impact all of my entire amount. This has tremendous implications for worldwide credit. It does not allow only the developing world to source credit, but people in the developed world can invest with much lower cost.

Senator: You have this organization intermediary. You have this organization like lendingclub.

AA: Yes. Indeed. Today we do. With bitcoin, this is what's happening. Many of the traditional services can be redesigned and recreated without an intermediary. This is a concept of disintermediation, where you can connect buyers to sellers, without intermedaries, is the magical power of bitcoin. That's what this has allowed us to do without establishing trust. We can have a decentralized market for credit and lending, that is global, near instantaneous and allows access to a vast pool of credit and that is a very exciting prospect.

Senator: From your perspective, if Canada would move forward and put some regulation, as some witnesses have asked of us, that the world did not follow, that the G7 countries did not follow in similar regulation, what would be the pro's and cons of such a move?

AA: Well, that's very interesting. Already we see tremendous regulatory fragmentation. We have a regualtor in NY state that has taken initiative to do regulation based on NY state law, but it looks just like traditional banking regulation and is not suited for bitcoin. There will be other forms of regulation. In the United States we are likely to end up with a patchwork of state, local and federal regulation. We will see this in other countries. Bitcoin can operate across borders very effectively, so bitcoin companies can migrate to areas of least friction and create the jobs and growth in the places that the regulation is best informed about the nuances and particular needs of bitcoin companies. I think Canada and other countries that are looking at this very carefully has an opportunity to be very careful and create an environment for these companies.

Senator M: Thank you for your presentation. As I read your notes last night, and this is with respect to regulations, our committees here in the senate are looking to put forward recommendations in a report to government that will hopefully become law to protect Canadians. You have talked to us about individuals being hacked. Companies who have.. have spent millions of dollars on their security architecture to protect that data that has been provided by their consumers. We have seen how vulnerable they are. How this data has been lost, major banks have come and indicated that they have been hacked months later to the surprise of their consumers whose credit cards and data's out there. And now you are advocating a decentralized system, when the traditional banking system is predicated on these security measures to protect consumers. We are interested in protecting Canadians, how would we do that going forward? I understand the rationale of access, especially when it comes to, for example, Africa and the other areas, we have seen the revolution of cell phone sand how that has changed banking for them. How would we go forth and protect Canadians?

AA: One of the big failures of regulation in the traditional environment is that with centralized identifiers and centralized regulation comes centralization of risk. So when an organization such as Home Depot or Target is hacked, and they lose 60 million consumer identities, the reason that represents an enormous impact because they were storing 60 million identities in the first place. Instead, if each one of those 60 million consumers had to be individually hacked and targeted, the possibility of that happening is dramatically lower. The advantage of a decentralized environment is that there is no central repository, there is no one vault or mother load where everyone's identity is stored where everyone can be attacked at the same time. Bitcoin proposes a different model where the risk and control is pushed out and put into the hands of users. It makes a system that is much more resilient to systemic risk. However, that means that the users have enormous power and enormous responsibility. That control exposes them to individualized risk. How do we mitigate that risk? It is already being mitigated by innovations. On the one hand, you have increased exposure of individuals one by one, but onthe other hand we have programmable money. The fact that it is programmable allows us to invent completely new models for money, such as devices that have keys that allow you to sign only on the hardware wallet, or multi-signature transactions where a number of signatures are required to release those funds. Those signatures could be from two different devices, like a laptop and their mobile phone, which gives them a greater degree of security. You could have secondary or tertiary controls stored on paper or on a device stored in a fire proof safe, whatever. Those are the basic things we are doing right now. But based on this technology already, we are seeing companies that are providing services to consumers, like providing a third signature to authorize a transaction based on a risk assessment. They can't take the user's funds. They can only sign and not sign a transaction. They are providing a risk check and that's all. We have never explored these experiments before. The technology wasn't flexible enough before. So I have great faith already just in the last two years as this technology has gone mainstream, the amount of innovation around that exact problem has accelerated tremendously. We are beginning to win in terms of protecting end user wallets. In this environment specifically, requiring users to attach identity to every transaction, and then put them in a central repository, to me that is folly, because it takes away the one opportunity we have, and it exposes us to the same systemic risk of central points of failure and risk that we have with credit cards. I am hoping that the market is allowed to develop these solutions.

Senator: My colleague raised a question, or issue, with respect to breathing time. And you indicated this as well. What would be a suitable time frame for us to be able to look on the, obviously this is evolving and developing, we believe that there has to be some regulations put in place to govern, similar to what has been down with the internet and privacy, and requests for information and so forth, with respect to the breathing time, and if we were to enact some regulation or legislation, what would that look like to govern bitcoin and its transactions?

AA: I think that if we look at the experience with the internet, the opportunity of the internet to develop its own models for self regulation was extremely effective. It delivered a lot of good to a lot of people. Ironically, when the US senate got around to regulating spam it was the same year that technology solved the problem. In some cases, waiting is the better option. I don't think that there's a major problem with consumer access to bitcoin in terms of risk to consumers. However, I think there are specific areas where your committee could provide clarity. Make a distinction between centralized custodial accounts and decentralized models of bitcoin operation. Centralized custodial accounts are dangerous to consumers. They present risk to users, like a traditional financial institution, but in this case there is zero oversight on these companies. When CAVirtEx asked for regulation, that is very sensible because they have complete control of their user's keys and operate in a traditional centralized manner. I think that leaving opportunities for the development of decentralized solutions, and recognizing that they are not subject to the same types of risks, and that they do not require the same sort of... would open up a lot of possibility for innovation. It's important to carve out some exceptions. There are exceptions in existing law in terms of personal use of small amount of exchanges for example, if I exchange a small amount of US dollars for canadian dollars, I will not be arrested for operating without a money transmission license. On a small scale, and for personal use, there should be clarity in the law that makes it clear that you do not require licenses to operate, and personal use as a consumer is not subject to banking-level regulation. This will be very useful for allowing further development.

Senator Meredith: What systems do you currently have in place with those individuals who would abuse this system?

AA: Traditional law enforcement has been tremendously successful to stop and track activities on the network. I haven't heard so far any particular need to change the way the network operates. Such a request would be met with no change, I don't control Bitcoin any more than anyone else controls Bitcoin. The network itself provides a level of transparency that law enforcement can use.

Senator Hervieux-Payette: Can you tell me whether there are countries at the present time that are recognizing bitcoin?

AA: I believe there are several countries in which Bitcoin use has been recognized in use in terms of legislative process, in terms of recognizing Bitcoin is money, in terms of the same rules of taxation and operation, but with it carries certain liberties. Within many countries, Bitcoin fits within the existing systems for currencies. I don't know if that has required specific legislation, or if any country has legislated for Bitcoin.

Senator: A short question on a matter that was raised previously, if Senator Rengette was to issue a Rengette coin, and our chair had Bitcoin for a number of months, what would the value be?

AA: The various currencies that exist out there are related based on a free flowing market rate. That market rate is determined by exchange between individuals on exchanges. This is the same mechanism with which the exchange rate between the Canadian dollar and the US dollar is established. I would argue that with that, if there is very low liquidity in that market, it will be very difficult to establish a price that is representative of the value of that currency, and price discovery will be difficult and will lead to large volatility. As Bitcoin and other currencies get larger, the volatility will decrease. The volatility of Bitcoin today is not at all dissimilar with the volatility of oil during the first decade of the discovery that oil could be used as a commodity or substitute for whale oil used at that time. It starts off with tremendous volatility, over time as the amount of volume and liquidity in the market, the volatility is reduced until these currencies become extremely stable. For a global currency, a $5 billion dollar valuation is tiny. I expect Bitcoin will stay volatile for a while.

Senator: There was a matter regarding the security or use of bitcoin. We are doing this study within a parliament that after this particular committee I will be sitting on the finance committee, I would be interested in the control that the government can exercise, if the value is constantly changing, how would a government be able to exercise its fiscal power?

AA: Well the citizen of that government would have direct control over the currency through their purchasing decisions. Bitcoin is not regulated. It is regulated both by mathematics but as well as dynamic markets that exist among its users. Both the price of Bitcoin and its value in commercial transactions is managed directly by the end user and those end users are the same constituents arguably. If they can apply direct control over the currency, they will do so.

Senator: My last question then, consider tax returns. What value would be used if we wanted to make a conversion for tax authorities because of course it is required to file a tax return and establish a value? If there is a serious amount of fluctuation, I realize the quantities are high, there are not many tax payers that have huge incomes, let's say the average Canadian, what would be the value .. how would we monitor this declaration of income or revenue?

AA: That is a very interesting question. Regulatory clarity would be very useful. I earn the vast majority of my income directly in Bitcoin. Since October of last year, I have earned very little of national currencies. I pay my expenses in Bitcoin too. For the purposes of taxation, I treat bitcoin as earnings in a foreign currency. I will assess the market value of the transaction when I earn the income at the current market price, and I will render taxes to the tax authority. That is the power of the tax authority, to pick the currency of their choosing. In the case of use of currency, the classification in the tax code depends on the use I have. If I use my brokerage account to purchase euros for investment purposes, and I sell them two months later and realize a gain, I will be subject to capital gains tax upon that gain. However, if I visit Paris, and I use euros to pay for a ticket to the local zoo, and the price of the value of euros changes between the moment I purpose that amount with my currency, and the moment I pay for the ticket, I am not assessed capital gains, and it is treated differently. The tax code is flexible enough to allow me to pay the appropriate tax for the appropriate classification. In the United States, there has been a ruling that says that Bitcoin operates as a commodity with a capital gains tax. However, a currency would have been the wrong answer too. If it is used for a long term investment, it should be subject to capital gains and losses. If it is used as a currency, it should be taxed as such. The tax system allows me to declare upon honor how to pay taxes, and then impose penalties upon me if I make that decision incorrectly.

Senator Tkachuk: Thank you for your testimony today. It has been an interesting afternoon. The other virtual currencies.. are they based on an algorithm as well? Is it the same one as used for Bitcoin?

AA: There are several algorithms within Bitcoin. There is a central invention which is the blockchain and the security model that uses consensus through proof-of-work that allows a network to arrive at a secure picture of what the current ledger is, based on competition. That central technology innovation is used in the vast majority of cryptocurrencies. However, there are other algorithms, like how much currency is issued and how often. We have seen a very broad range of choices, like currencies that are far more inflationary, even to currencies that implement a negative interest rate that encourages consumption and discourages savings. As a laboratory, these currencies can express a very broad range of monetary policies and even political perspectives. The underlying invention is almost exactly the same across all of these currencies.

Senator: We have heard about the miners in previous testimony. They are the ones that issue the currency or mine the currency. There were some stories in the paper in June of this year where a company had over 51% of the mining market for Bitcoin. So it was developing a quasi.. does it have the ability to develop a total monopoly in issuing bitcoin, and then, does that jeopordize the whole currency? Are there controls on that?

AA: So I think it's important to emphasize the fact that the purpose of mining is to secure and verify transactions. The reward for mining is currency issuance. Mining is rewarded with currency issuance for securing the network. The reward acts as an incentive to make sure that the network remains secure. The mining company in question operates as a pool similar to a lottery pool. They did not control the hashing directly. They acted as a central location whereby many independent miners could put it behind this in order to achieve smoother returns on their investment, whereas playing the lottery yourself you may win on an irregular schedule, but as part of a pool you get more frequent but lower payments. So they pool their actions together. When ghash approached but did not reach 51%, they approached the high 40s actually, this led to a market response such that individual miners recognizing the potential risk to the reputation of the network, although I don't believe it was a serious technical risk, withdrew their hashing power and redirected it to other pool operators. Shortly thereafter, had their mining power drop to slightly below 30% of the entire network. So this provides some protection to the network, but at the same time it's not large enough to provide a monopoly. On a technical note, a miner or pool achieving the majority of the network, can potentially disrupt the processing of the network for a short term. However, they cannot steal funds from any of the users, they cannot redirect funds from any of the users. They can only delay them and delay the processing. It is not as big of a risk as most people believe it is. Because of the market mechanisms behind it, we have seen that it is a self-correcting system.

Senator: So is it just a method of exchange? If I had yen in Canada, I really can't buy anything, I have to go to a bank and .. because nobody takes it. I have to go to a bank and exchange it to Canadian dollars so that I can buy something. And it's the same in each country. And in each country those dollars have certain value, and so does everyone else, I still deal in Canadian dollars and it stays the same on Canadian products, unless it depends on imports and all the rest of it. Does the virtual sphere itself have its own sort of stability, in other words, when something is priced in Europe for 1 bitcoin, and I have 1 bitcoin, can I buy that for 1 bitcoin even though the value of that bitcoin has changed in relation to the currency of my country or the American dollar?

AA: The exchange rate between Bitcoin and individual currencies such as US dollars, Canadian dollar, euro, etc., has sufficient liquidity that arbitrage is possible between various exchanges. This means that the purchasing power is the same no matter what the national currency. The fluctuations are miniscule. If I can buy a bitcoin for Canadian dollars and sell it more expensively for US dollars, that creates an opportunity for arbitrage. Arbitrage in Bitcoin is more effective because it can be transmitted almost instantaneously across borders, whereas in traditional markets, it takes longer to transmit money. My bitcoin purchasing power while volatile overall, is the same across any national currency.

Senator: Could you see a time, or is that where we're heading, where internationally, things would be priced in Bitcoin? And bought and sold in Bitcoin no matter what's happening in the national currencies only because you save so much money in exchange and all the rest of it? Is that where we're headed?

AA: I believe that in the long term that Bitcoin can be stable enough to price items in Bitcoin. It will be a universal currency on the internet. That would make it extremely competitive on the internet both in terms of ease of use and flexibility. I would expect that to happen, but I think we're several years away such that the volatility allows things to be priced in Bitcoin.

Senator: Bitcoin can be stored. Say when the senator buys bitcoin, where does he keep his bitcoin, do you keep it in your own wallet, or is there a virtual wallet where you keep your bitcoin? Can you do that?

AA: This may be a tiny bit too technical. I have some insight to provide anyway. Bitcoin is not stored by individuals. The public ledger has who has bitcoin. What the senator has is the keys that allow him to sign for transactions, the signatory control to unlock them. How you store the keys, there are many ways. They are just numbers. I actually print these out and put them in a physical medium. I have keys that control smaller amounts of Bitcoin, kind of spending change if you would like, on my mobile phone, I have some on my desktop, and I keep the vast majority on printed copies that are physically secure. Those can't be hacked, you have to actually break into my house.

Senator: Companies may do thousands or millions of transactions. Can bitcoin adapt to that? Can you pay payroll of a thousand people or 500 or 200 people easily with bitcoin and do the deductions?

AA: Not only can you do that, but a medium-skilled programmer can do that in a few hundreds of lines of a programming language like Python, accessing the entire financial network and instructing it to do that. Which is fascinating. Not only that, but they can do transactions to people in 100 different countries, which is impossible with traditional finance. Google pays tens of thousands of affiliate companies for ad revenue, the cost for paying these companies is enormous. Using a single currency for electronic payments can be done. It can be done very efficiently and globally. And very cheaply.

Senator: Thank you Mr. Chairman. First of all a comment and then some questions. I agree with my colleague senator campbell when some people of a certain age might have some trouble trying this out. We did have a machine and the Chair generously bought $100 of Bitcoin, I don't know what has become of it, I don't know whether there has been a loss, but that's not your problem. You said that a user of Bitcoin might be able to predict what the monetary supply in the future. If that user of a Bitcoin such as the Chair is able to predict the monetary supply in 30 years from now, it seems to me that the minister of finance should probably have made use of this for next five years or whatever, it seems to me that you are certainly, if you are able to tell it what the money supply will be in 30 years, this is very useful knowledge.

AA: It is designed to simulate the extraction of precious metals in its progression. It is in fact entirely possible with high accuracy how much currency will be able to the market at a specific time. This does not mean that the supply will meet the demand, or that it is the correct supply. We just know what it will be.

Senator: On that particular point, I think that any insurance company or actuary, when they establish an annuity over 30 years for example, are able to make a good prediction for the figures which will probably turn out quite realistic, they are able to make an extrapolation, a simple mathematical formula, and this can be done by an actuary. I have a question that is quite puzzling. Do you think that the Bitcoin system, will duplicate the present banking system, that banks are able to adapt to any type of new technology, and the world banking association, when it comes to capital, will probably invest more in technological research than Bitcoin could ever be.

AA: Bitcoin is, or rather the invention behind Bitcoin, the blockchain technology, is an invention that will have a substantial influence over the future of banking. I have had several discussions with banks that are very interested in using similar systems for making more efficient networks within the banking system. For example, today a lot of clearing operations like for world-wide fund transfer, or clearing, or stock and equity purchases, are handled by intermedaries. Bitcoin would allow banks to handle those in a decentralized network by simulating the same technology as bitcoin on their own. Banks in the developing world are interested in using this to extend services to places where they can't deploy infrastructure. Telecom was once threatened by the internet, but then found ways to use the internet. I would not be surprised if very big parts of the financial ecosystem runs on top of blockchain technology or perhaps Bitcoin itself.

Senator: this leads me to ask you then, do you not have the impression, that you swallowed up, because the banks will never ever let you have so much operating scope? Not just Canadian or American banks, I don't think that the banks will let this go by without reacting. I realize this is quite successful, that young people are very enthused about it, but I don't think banks are going to let themselves be dispossessed because Bitcoin is not a solid organization, but rather just a virtual one.

AA: The exact same discussion when the idea that the international telecommunication union would be threatened by the internet, the idea that world leaders or states would allow people to give freedom of information, the idea that the internet would be allowed to subvert the rule of despots around the world, was ridiculous. And yet all of these things have happened. I believe that Bitcoin, by empowering individuals and especially individuals that do not currently have access to banking, will create a thriving economy of its own, will create an economy that ends up opening up entirely new opportunities to the banking industry. Many of the old profit sources will be disrupted. Today, AT&T's long distance network has been completely disrupted. They did not give up when Skype happened. They became the world's largest internet service provider. Bitcoin will deciminate certain industries, such as high-profit low-service industries like remittance. This will open up new services and new products. Economic activity that brings together billions of people together on the same system is so much bigger than the potential risk this may pose to the profits of incumbents.

Senator: We are going to enter round 2. In your comments, which have been fascinating, one of the motivators is the technology that will bring to people that do not have it today, and you believe that it will empower people around the world. I believe that Bill Gates is making use of a digital currency on mPesa. Can you expand on what you think the implications of Bitcoin or mPesa will have on, say, Africa?

AA: mPesa is fascinating because it has shown what is possible when low friction digital money is introduced in an environment that does not have banking infrastructure. mPesa was started as an experiment for people to send cell phone minutes to friends and family. The moment this became a currency was a very mundane moment, I imagine. They probably arrived at a store and realized they didn't have enough money to buy some eggs, and then traded the minutes instead. What's fascinating about mPesa, just 12 years have gone by, and it's responsible for 40% of the GDP of Kenya. That's a staggering amount. It represents the adoption of what was largely an underground cash-based economy, one that was illiquid and inflexible and very slow to operate, and turbo charging that by allowing liquidity into the economy system. At the moment Bitcoin is not ready to be adopted on the Nokia 1000 smartphone. There are billions of those phones. It requires some infrastructure. We see two trends converging. One is that Bitcoin is being applied to simpler and simpler technology, like sms and text messaging. The other one is the collapse of the pricing of Android smartphones for a mere $25 dollars. There are already Android applications for Bitcoin. He can become a bank serving thousands of customers and giving him access to the equivalent of a Western Union terminal, a trading facility for all of the world's markets, and all of this off of the sms feature phones and an Android phone. mPesa shows that this is possible. When we talk about the unbanked, the World Bank estimates that there are 2.5 billion people at least without banking. But that is an underestimate. The ability I have to access a brokerage account to convert any currency I want without controls, to transmit money to any country I want, and to use it as a simple consumer, is very very far removed from what most people. So if you look at the unbanked as those with a single currency only with a closed account without access to trading or credit, more than 6 billion people in the world live with that banking, and at least 2.5 billion of them are unbanked. Bitcoin can change that environment dramatically in less than a decade.

Senator: Thank you very much Mr. Chairman. I would just like to thank you for this contribution. Extremely helpful. I would like to move to some final points. I would like to take from your comments arising from what Senator Ringette asked. We have been exploring the opportunity for Canada for innovation if we get this right. What is this opportunity?

AA: I think there are two aspects to this. There is the pure research and technological capabilities that might exist in the Bitcoin sphere. One of the things that I like to emphasize is that it is not just money for the internet. Bitcoin is the internet money. Currency is the first app. Currency is running on the decentralized trust network based on the blockchain technology. The bitcoin currency is almost the same as email was in the 90s. It enabled the growth of the internet. It was the killer application that made it worthwhile for people to get involved. But it did not open our eyes to the endless possibilities, the web, Facebook, Twitter, things like that. Bitcoin the currency is the tip of the iceberg, it is the prototechnology that will bring it to consumers. There will be other apps. From a pure research and innovation perspective, it's incredible. The possibilities of extending banking services is important too. Canada has pockets.. close to 18% of the population in the US has very limited banking capabilities. There are pockets within this country that have very little access to banks. I think the combination of primary research and innovation in these new technologies, and banking to new disadvantaged parts of the population is very potent, especially if we take advantage of the international nature of the currency.

Senator: How did NY state get this wrong?

AA: I think they got it wrong in many ways. One is by rushing to regulate very soon. Another is by regulating bitcoin in exactly the same way as the banking system currently operates and failing to see the distinctions between Bitcoin and the current system. The only analogy I canthink of is if in the proto internet, the federal communications commission in the US would decide that the internet required every website operator to have a license. Such an outcome would have almost certainly destroyed the internet industry in the US, however it would not have impacted the internet industry everywhere else, it would have pushed innovation elsewhere. Treating Bitcoin as a fancy bank account is wrong. Regulating it as such stifles it. It puts it in the playing field of incumbents, it puts in places the same regulations, and it forces us to behave more like a bank, and yet its unique characteristic is that it isn't a bank.

Senator: One technical question. On a technical note, many countries and provinces have sale taxes and income taxes. For the merchants using the Bitcoin currency, is there a software already in place? Is it easy to do the accounting?

AA: Absolutely. It is easier with Bitcoin because the public ledger provides a complete record are available. I pay sales tax to Califorina. And I pay income tax to the United States. And I use traditional accounting software. Yes. Although it's rather cumbersome at the moment. In my normal banking traditional banking if you like, I have like four or five different accounts. In Bitcoin I have well over 2,000 accounts. It makes sense to create a new account for every transaction. However, the software is being developed, so it will get better.

Senator: This is a highly secure form of anonymous form of property, currency, but right now it's in a sense of bartering, but it seems to me that this could be useful, like exchange of property, where there are notaries or lawyers for establishing the transfer of property. It looks like this technology can be used. Say 5 years forward, how does this technology get used?

AA: There are some very interesting applications where the decentralized ledger is used as a public record for all sorts of things, like registering bicycles, company shares, automobiles, ... two days ago I was at a Bitcoin conference where a couple was married and used the blockchain for a registrar of the marriage contract. Also public deeds and public titles, like for vehicles and property. Even better and more importantly, the car could look up its own title and render itself usable to the new owner automatically, and this concept is called smart property where the property recognizes its ownership through the blockchain. All forms of registration can be implemented in the bitcoin blockchain. You can issue share certificates. You can sell your bandwidth. You can have sharing economies like AirBnB or sharing cars today, we can do that using tokens. There is a company in Toronto, that allows you to unlock a door, for an AirBnB apartment, so that your phone makes the payment, and then you have access to that property.

Senator: Secondary question.. why is the blockchain for a couple getting married? What's the issue there?

AA: It was largely symbolic. It was a proof of concept. This couple was already married under state law. They wanted to record their marriage on a record that was publicly accessible, unforgable and unchanging through time. It provides a permanent record and an unalterable history, that within an hour is completely unalterable by anyone that will be preserved for all time.

Senator Greene: I really take your point about the dangers of premature regulation because we don't know where this is heading and the pace of change is large, and we don't want to influence the pace of change. We have to write a report, and the report will have some recommendations. What would be your reaction be to a report with one recommendation, that we do not regulate, and that we revisit this in 5 years?

AA: I think that would be a very good idea. I think that there are some things that require clarification. Like the tax status. Or the right in the choices of currencies. The legality of digital currency with any other national currency. Recognizing that this is a private form of barter and transaction. Recognizing the corresponding principles, which I think are neutral principles, but they are those of enlightenment, freedom of association and expression. I think that removing ambiguity in that arena for personal use would be enormously useful.

Senator: This meeting is concluded. Everyone get out.